Businesses fail for many reasons — dysfunctional management, insufficient working capital, insurmountable competition. Why they succeed, on the other hand, is often easily explained. Regardless of size and sector, most healthy companies share the following three characteristics when it comes to their financials:
1. Ample revenue
You’ve no doubt heard it before, but this cliché is true: Cash is king. Without a robust revenue stream coming in, profitability will be precarious. To determine how much revenue your company needs to be profitable, perform a profitability breakeven analysis. Then review your sales and determine where you can make changes. For example, you may need to invest more in R&D or focus more on prospective customers.
2. Well-managed labor and production costs
For most companies, labor is their biggest production cost — particularly when benefits and taxes are factored into the equation. Determine whether your labor force increases the value of products or services enough to offset its high cost. If not, consider solutions such as:
- Providing more training or better incentives,
- Improving production processes, or
- Investing in more modern facilities.
When production overhead costs are too high relative to a product’s sales price, take action. You might increase the price of the product, find better production methods or even discontinue the product.
3. Lean operations
Operating expenses — costs you incur to run your business that aren’t directly attributable to production — must be minimized. For example, compensation takes a big bite out of your operations budget, so monitor staffing needs relative to sales and adjust them if necessary. And while you can’t eliminate marketing expenditures, you can review your sales levels relative to them and ensure you’re getting bang for your buck.
Establish a foundation
If you’re trying to build the foundation for a healthy, long-lived business, focus on these three keys. For help applying them to your company’s specific size and situation, contact Alerding CPA Group at 317-569-4181 or visit our website: www.alerdingcpagroup.com.